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  • Writer's pictureTrivedi and Parashar (Advocates and Solicitors)

Judicial Updates -

Delhi High Court - In recovery proceedings, statutory remedies provided under the securitisation and reconstruction of Financial assets and enforcement of Security Interest Act, 2002, are to be used by the borrowers before using Article 226.

In the matter of Diamond Entertainment Technologies Pvt Ltd & Ors. v. Religare Finvest Limited [W.P.(C) 17417/2022 & CM APPL 55452/2022], under Section 14 of the Securitization Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"), the Petitioners seek to overturn the order made on December 2, 2022 by the learned Chief Metropolitan Magistrate (CMM), South East District, Saket District Court.

A 10-crore rupee loan secured by real estate was at issue in the case. The loan was labelled as a non-performing asset (NPA) due to a repayment default. The Respondent, a secured creditor, started legal proceedings in accordance with SARFAESI Act Sections 13(2) and 13(4) in order to recoup the outstanding amount and seize the mortgaged property. Later, under Section 14 of the SARFAESI Act, an application was submitted to the Magistrate, who approved it and named a Receiver to assume control of the mortgaged property.

The borrower argued that a legal hole must be filled because the remedy under Section 17 of the SARFAESI Act cannot be used until Section 13(4) of the SARFAESI Act actions are taken to take control of the secured asset. As a result, the borrowers contested the notices sent by the respondent in accordance with the SARFAESI Act. Because the borrower companies lacked a legal avenue through which to address their complaints, the court was forced to intervene in accordance with its authority under Article 226 of the Constitution. The legitimacy of the Receiver's appointment, numerous precedents on the jurisdiction of writ courts in such matters, and the order in which the parties involved took legal action were all cited throughout the legal processes.

The Court noted that once the actions under Sections 13(4) or 14 of the SARFAESI Act are taken, the remedy would, in any case, lie under Section 17 of the SARFAESI Act and that the borrower could not rely on Article 226 of the Constitution to defeat the purpose of recovery proceedings.

The secured creditor could choose to apply Section 13(4) or Section 14 measures in Section 14 proceedings, according to the court. Under the SARFAESI Act, borrowers or guarantors were not permitted to direct how the secured creditor should proceed.

Additionally, it was decided that there is no legal prohibition against the creditor moving to steps under Section 14 after initiating measures under Section 13(4) and thereafter withdrawing the original measures.

The Court dismissed the claim that the petition was legitimate because the respondent NBFC was purportedly performing public duties. It was made clear that Religare, an NBFC, couldn't be regarded as a public entity because it couldn't be demonstrated that it performed any public duties. The petitioners' request for a public law remedy was improper, the court emphasised, because the loan agreement was a private transaction for financial benefit that lacked any public components.

Under any case, it was noted, if the petitioner-borrowers believe that action taken against them is irregular or illegal, the remedy would be found under Section 17. Accordingly, it was determined that the petitioners cannot use Article 226 to defeat the purpose of the recovery proceedings and that the extent of writ jurisdiction cannot be allowed to trump the statutory requirement.

The High Court reaffirmed that the borrower must wait until the creditor takes action to gain possession of the mortgaged property under Section 13(4) of the SARFAESI Act. The possibility of writ jurisdictional involvement during the interregnum is not justified.

Further, "This court cannot transgress into the domain of the legislature to fill the alleged legal void in the scheme of SARFAESI Act, which according to the petitioners, is rendering them remediless under the Act before the possession is taken over by the respondent. This court cannot create a fresh normative reality by interpreting the way as desired by the petitioners. The scope of writ jurisdiction cannot be allowed to trounce the statutory obligation, on the stratagem of efficacious alternate remedy."

The High Court dismissed the petition.


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